CQ WEEKLY – IN FOCUS
March 10, 2012 – 12:05 p.m.

The Fed: A Populist Target, but Untouchable

By Ben Weyl, CQ Staff

For a brief time in the presidential campaign, the name Ben S. Bernanke was a sneer on the lips of every Republican contender. The Federal Reserve chairman had become a target eclipsed perhaps only by Barack Obama, with verbal assaults on Bernanke personally, and the Fed as an institution, yielding surefire applause during the presidential debates.

UNBOWED: As recently as Feb. 29, Bernanke defended the Fed's controversial policies to lawmakers. (CHRIS MADDALONI / CQ ROLL CALL )

Top GOP congressional leaders seized on the anti-Fed rhetoric and sent Bernanke a remarkable letter last September, warning against further action to boost the economy.

Even as the Fed has drifted out of the presidential candidates’ cross hairs, a top GOP lawmaker introduced legislation last week to curb the central bank’s authority and mission.

“People like Ron Paul, they’ve always been anti-Fed, anti-government, back to the gold standard,” says David Wyss, a longtime Fed watcher who was chief economist at Standard & Poor’s and is now a visiting fellow at Brown University. “But it’s extended beyond that.”

The reason why the Fed came to attract so much political mudslinging and why it has, at least for now, faded from the presidential contest are one and the same: The U.S. central bank is an institution whose immense power invites attacks but also quashes them.

The Fed is an easy punching bag in times of economic distress. Because it plays a pivotal role in guiding the economy by setting targets for interest rates and managing the nation’s money supply, expectations are high that it will be able to avert any looming disaster and keep things humming. When the economy goes off the rails in spite of the Fed’s efforts, as happened during the 2008 financial crisis, the central bank shoulders much of the blame.

Moreover, the anti-Fed movement taps into a populist force with deep roots, stretching back to President Andrew Jackson’s campaign against the 19th-century version of the national bank (“a den of vipers and thieves,” in words commonly attributed to Jackson).

As a secretive operation whose influence deeply affects Wall Street, Main Street and rural back roads, the almost 100-year-old Fed draws skepticism from the public. It has always had its critics, although they have often hailed from the fringes of politics and their complaints have rarely reached the main stage.

Times Have Changed

That has changed in the era of the tea party, as the GOP establishment heavily courts conservative insurgents. The central bank stands at the nexus of high finance and Washington, so slamming the Fed is an easy way for Republicans to connect with those suspicious of elites and angry over bailouts. The Fed’s many efforts in the recent past to pull the country out of recession have only further inflamed conservatives distrustful of government intervention.

Some Republicans have called for varying degrees of action to overhaul the central bank, from narrowing its mandate to eliminating the chairman’s job security. Regardless, most analysts do not expect such legislation to pass, even if the GOP wins control of the White House and both houses of Congress in November. Taking serious aim at the Fed would likely unnerve investors and do lasting damage to the economy. Moreover, changing the Fed might deprive politicians of a useful scapegoat.

“There are enough people in Congress that understand the value of the independence of the Fed,” says Alan S. Blinder, a Princeton University economist and former Fed vice chairman. “You can use them as a whipping boy.”

The Fed: A Populist Target, but Untouchable

Under Attack

The Fed is no stranger to harsh public criticism, particularly when the economy is in the dumps. Today, former Fed Chairman Paul A. Volcker is revered for ending the persistent high inflation of the late 1970s and early 1980s, but he was widely reviled at the time for his medicine of sky-high interest rates.

At one point, angry farmers driving tractors descended on Washington, circling the Fed’s headquarters at C Street and Constitution Avenue. Contractors sent two-by-fours to represent the houses that were going unbuilt.

Many of those two-by-fours were still there when Randall S. Kroszner began his service as a Fed governor in 2006. Now a professor at the University of Chicago business school, Kroszner says the backlash is to be expected: “Whether it’s Chairman Volcker or Chairman Bernanke, when the economy is not doing well, the Fed is going to be in the eye of the storm.”

Still, for all the agitation, presidential candidates in the past largely shied away from taking on the Fed directly. Larry J. Sabato, director of the University of Virginia’s Center for Politics, says he cannot recall a presidential election in which the Fed was such a visible issue.

The only close analogue, according to Allan H. Meltzer, the author of a history of the Fed, may have been during the 1960 contest, when an adviser to John F. Kennedy urged the Fed chairman’s resignation.

“That was a contentious period, but nothing quite so critical was said about the Fed as in present time,” says Meltzer, an economist at Carnegie Mellon University’s business school.

Last August, Texas Gov. Rick Perry likened Bernanke’s efforts to boost the economy to treason and suggested that the chairman would be treated “pretty ugly down in Texas.”

Perry’s comments were roundly condemned, including by top Republican officials, but other attacks soon became commonplace. At a September debate, former House Speaker Newt Gingrich promised to immediately fire Bernanke, calling him “the most inflationary, dangerous and power-centered chairman of the Fed in the history of the Fed.” Moments later, in the same debate, former Massachusetts Gov. Mitt Romney blasted the central bank’s policies and said he’d be looking for somebody new to run it.

That was something of a rhetorical shift for Romney, who had previously refused to join in the bashing. “I think Ben Bernanke is a student of monetary policy,” Romney had said in an April interview. “I’m not going to spend my time going after Ben Bernanke.”

During the 2008 presidential contest, libertarian Rep. Ron Paul of Texas, a persistent Fed-hater, was alone among candidates in his cry to “End the Fed.” This year, the others have been scrambling to keep up with Paul, whose support among the voters had mushroomed.

On the stump in South Carolina, Gingrich, acknowledging that the president does not have the authority to fire a Fed chairman, said he would urge Congress to remove Bernanke.

That comment suggests that he would try to alter the Fed chairman’s four-year term — an explosive move to cut into the central bank’s independence.

The Fed: A Populist Target, but Untouchable

Gingrich also pledged to form a commission to examine returning to the gold standard, Paul’s longtime hobbyhorse. Gingrich reached a crescendo in his South Carolina primary victory speech, praising “Dr. Ron Paul, who on the issue of money and the Federal Reserve has been right for 25 years.”

Those comments may have raised some eyebrows, but probably not many. Hostility to the central bank has grown rapidly in the conservative grass roots as the Fed has taken on a more visible role in the economy.

“When you’re running for the nomination, you try to reflect the views of the activists, and a sizable number of activists think the Federal Reserve is the evil being behind our economic problems,” Sabato says.

Hostility History

It was not always this way. The Fed’s tendencies are largely conservative, and it is closely associated with the financial industry, which has strong ties to the GOP. Bernanke, a registered Republican who was first appointed to the Fed by President George W. Bush, enjoyed high marks among Republicans in his first years. In April 2008, 61 percent of Republicans told Gallup pollsters that they had confidence in the Fed chairman. A year later, with Obama in office, GOP support for Bernanke sank to 36 percent.


Meanwhile, investors have only grown more confident in Bernanke. In a January Bloomberg News survey, 69 percent viewed him favorably, up 3 percentage points from the previous year.

The Fed probably entered the political consciousness of many conservatives during the 2008 financial crisis. With the financial system teetering, the Fed used its emergency lending powers to provide trillions of dollars to banks in the hope that they would keep credit flowing. That the Fed, and U.S. Treasury, will probably earn a profit on those loans makes little difference to those outraged by bailouts.

Conservative grass-roots activists associate the Fed with “backroom deals and corruption,” says Brendan Steinhauser, director of federal and state campaigns for FreedomWorks, a prominent group affiliated with the tea party.

Bernanke’s more recent efforts to restore economic growth after the recession only further aroused the ire of the GOP rank and file.

Since December 2008, Bernanke has kept interest rates exceptionally low — essentially zero — and recently pledged to keep them there until late 2014, a remarkable commitment. Bernanke has also led the Fed to buy, in two rounds, $2.3 trillion in long-term securities to further aid the economy.

That second round, begun in November 2010, remains a critical point for those worried about inflation, although such fears have so far proved unfounded. In the ongoing debate over the appropriate role of government, Republicans have seized upon it as another example of what they see as federal overreach into the economy.

Such high-profile conservatives as former Pennsylvania Sen. Rick Santorum and House Budget Chairman Paul D. Ryan of Wisconsin have endorsed changing the Fed’s legal mandate so that it is focused only on keeping prices low and does not pursue job growth.

Last week, Rep. Kevin Brady, a Texas Republican who serves as vice chairman of the Joint Economic Committee, introduced a bill to accomplish just that. Brady’s bill also would bar the Fed from purchasing mortgage-backed securities to aid the economy.

The Fed: A Populist Target, but Untouchable

“The Federal Reserve’s monetary experimentation of the last decade must end,” Brady declared in a speech at the conservative American Enterprise Institute.

Bernanke has also faced opposition from some Fed colleagues. Thomas Hoenig, who until recently was president of the Federal Reserve Bank of Kansas City, one of 12 regional banks that are part of the Fed system, voted against several policy decisions. He has called monetary stimulus “a bargain with the devil.”

That sentiment squares with FreedomWorks, though even Steinhauser expresses surprise that a debate over the fine print of monetary policy has caught fire. “The fact that people are talking about quantitative easing is incredible,” he says.

FreedomWorks pushes the anti-Fed narrative on its website, at conferences and through word of mouth. It has passed out 2,000 copies of “The Creature from Jekyll Island,” a conspiratorial book on the Fed’s creation written by G. Edward Griffin, a former official at the far-right John Birch Society. Last March, Glenn Beck hosted Griffin and praised the book on his Fox News Channel show.

Indeed, the anti-Fed movement overlaps with some of the uglier strains of American politics. In a forum on the white nationalist website Stormfront.org, one person asked why Ron Paul was such a favorite there. “Because he opposes Jewish supremacist (the Fed) control of the money supply,” read a typical reply, repeating a decades-old anti-Semitic trope associated with the central bank.

Most criticism of the Fed isn’t based on such extreme views. Still, Blinder acknowledges the paranoia and laughs it off. “Believe me, I know Ben Bernanke really well,” he says, referring to his former Princeton University colleague. “You’d be hard-pressed to find a less conspiratorial person on the entire planet.”

Blinder says he is mystified by conservatives’ alarm at the expansion of the nation’s money supply and the desire to return to the gold standard. “Curiously, some elements on the political right seem to have just discovered that the Fed has the power to create money,” he says. “It’s slightly wacky. That’s why you have a central bank.”

Always a Target

Equally fundamental to a central bank is its freedom to act without political constraint, which is why a campaign against the Fed’s independence is unlikely to go far. That said, Bernanke clearly understands the mounting pressures, and he has responded by opening up the Fed to an unprecedented degree.

Until 1994, the Fed did not even announce when it had changed interest rate policy. Under Bernanke, it has begun publishing forecasts of potential future rate changes. The Fed also recently announced a set of longer-term goals and policy strategies, including its ideal inflation and unemployment rates.

The most visible change came when Bernanke became the first Fed chairman to hold regular news conferences. In January, a reporter asked him to comment on the GOP presidential candidates’ assaults and whether he would resign if a new president should ask.

“I’m not going to get involved in political rhetoric,” Bernanke answered. “I’m just going to stay completely away from that.”

Still, he made clear he would not be moved by the political winds. “As long as I’m here, I will do everything I can to help the Federal Reserve achieve its dual mandate of price stability and maximum employment,” he said.

The Fed: A Populist Target, but Untouchable

Even if Republicans gain the White House and hold majorities in Congress next year, the GOP’s backers in the financial industry will surely urge a new president to move cautiously.

“I think the Republican establishment would see the importance of maintaining an independent central bank role. When central banks make decisions based on political influences, they lose their credibility,” says Mark W. Olson, a former Fed governor appointed by Bush who is now co-chairman of Treliant Risk Advisors. “I think, at the end of the day, cooler heads tend to prevail.”

In the short term, investors might be spooked if Congress tried to limit the Fed’s independence. The Dow Jones Industrial Average might drop 2,000 points or more, Blinder suggests. Even less-drastic legislation to change the Fed’s mandate probably wouldn’t go far, for the same reasons.

In fact, the anti-Fed pendulum may already be swinging back. As the GOP race for the nomination has ground on, Paul’s support has faded, as has the frequency of Fed attacks on the campaign trail. At a hearing last month, Sen. Charles E. Grassley, an Iowa Republican not known for pulling his punches, offered support to Bernanke and urged him to continue his push for transparency.

“You’re too important for people to think that there’s some conspiratorial aspect of everything the Federal Reserve does,” Grassley said. “And this comes up not often, but it comes up too often in my town meetings.”

FOR FURTHER READING: Fed’s dual mandate, 2010 CQ Weekly, p. 2702; Fed under fire, p. 326; Brady’s bill is HR 4180.